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Edited Transcript of EIL.V earnings conference call or presentation 27-Aug-19 6:00pm GMT

Q2 2019 Empire Industries Ltd Earnings Call

WINNIPEG Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Empire Industries Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allan Francis

Empire Industries Ltd. - VP of Corporate Affairs & Administration and Corporate Secretary

* Kenneth Guy Nelson

Empire Industries Ltd. - Executive Chairman, CEO, President & Director

* Michael Martin

Empire Industries Ltd. - CFO

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Empire Industries 2019 Second Quarter Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Allan Francis, Vice President of Corporate Affairs and Administration for Empire Industries. Please go ahead, sir.

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Allan Francis, Empire Industries Ltd. - VP of Corporate Affairs & Administration and Corporate Secretary [2]

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Hello, everyone, and welcome to Empire Industries Second Quarter 2019 Investors Conference Call. Today, we will have information presented by Guy Nelson, Executive Chairman and CEO of Empire Industries, as well as Michael Martin, Chief Financial Officer.

On the first part of the call, we will provide insights into the company's performance from the second quarter of 2019. And after that, we will be available to respond to your questions.

But first, here are a couple of housekeeping notices. Empire's Annual Shareholders Meeting will occur October 16 at 10 a.m. at the Ivey Donald K. Johnson Centre in Toronto, Ontario, 130 King Street West. That is the same location as last year. Formal notice will be going out in September.

If you'd like more information about Empire or to receive regular update bulletins and to receive an invitation to the annual meeting, please let me know. You can find my e-mail on the bottom of any of our press releases. Today's conference call is being recorded. The recording will be available on our website tomorrow.

We remind you that our remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of our results news release as well as in our MD&A. You can find these on our website and on SEDAR. The company's actual performance could differ materially from these statements.

Empire is in the themed entertainment industry, which is experiencing significant growth in the U.S. and around the world. Our specialty is designing and building the iconic centerpiece rides in theme parks. In fact, you may have ridden our rides without knowing it. That's because we work confidentially with global theme park operators to create many of the world's most popular attractions. In addition to Orlando and California, our rides are also in theme park resorts located in Japan, Korea, China, Macau, France, Russia and the Middle East.

We've also been working hard to enter the rapidly growing location-based entertainment market with an incredible high-fidelity guest experience. This will be done through co-venture partnerships. Under this initiative, we will be partnering with tourist venues to co-own and operate our attractions, thereby earning a long-term predictable recurring and growing revenue stream.

Now I'll turn the call over to Michael Martin, Empire's CFO.

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Michael Martin, Empire Industries Ltd. - CFO [3]

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Thank you, Allan. Here are the highlights of Empire's second quarter 2019 consolidated results. Contract backlog as of June 30, 2019, was $255 million, up 9.4% from $233 million as at March 31, 2019. Revenues increased by $8 million to $41.6 million from the same quarter last year. That was an increase of 24%. Improved liquidity and the resolution of an outstanding claim are the key drivers in the increased revenues.

The increase in adjusted gross margin percentage of 2.7% to 19.4% was directly impacted by the resolution of an outstanding claim and the processing of more profitable work during the second quarter of 2019 as well as the impact of adopting IFRS 16.

Selling, general and administrative expenses decreased by $0.5 million in the second quarter and $1.4 million in the first 6 months compared to the prior year. The decreases in SG&A expenses are primarily the result of previously announced cost reduction efforts with the balance being due to reduced SG&A expenses from adopting IFRS 16. Under this accounting change, the group no longer expenses operating lease payments, but rather charges a lease cost to interest and depreciation.

Adjusted EBITDA increased $3 million up from $0 in the second quarter of 2018. Our finance cost has increased in the second quarter of 2019 to $2 million. Because of the debt, the interest rates inherited the debt of our refinancing (inaudible) add the impact of IFRS 16, when the interest charges are now in lieu of the operating lease payments. The group, however, did generate $1 million of cash flow after finance cost versus $0.4 million used after finance costs in the 6 months ended June 30, 2018.

Net income increased to $1.7 million from a net loss of $1.2 million in the second quarter of 2018. That is an increase of $2.9 million. Not included in the group's increase in adjusted EBITDA through the 3-month period are increases in finance cost, depreciation and amortization and negative fair value changes in derivative financial instruments, offset by the reduction of the group's rebate liability.

The net reduction of the group's -- of the rebate liability of $3.5 million came from a customer rebate that was redeemed in the second quarter of 2019 because the new order that was received in (inaudible) described. Group has a strategic agreement with one of the key customers whereby they earn a rebate based on the volume of new business executed during any given year. There was $38.5 million of senior debt financing raised in April and $7.55 million of convertible preferred shares raised in June. These funds helped reduce the accounts payable as well as reducing the deferred revenue from construction contracts. The combination of this financing has improved the group's liquidity and ability to process its increasing backlog of work.

I will be available for questions at the end of the presentation. Now let's hear from our CEO, Guy Nelson.

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Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [4]

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Thanks, Mike. Empire's profitability continues to improve. For the last few quarters, we've been focused on 2 things. First of all, streamlining our operations. Secondly, we've been -- had a concerted effort and push to commission 2 IAAPA Brass Ring Best New Concept award-winning rides that will be -- surely become 2 of the industry's most iconic attractions by the end of 2019.

I'm very pleased to note that this is the first quarter where we can see the fruits of our labor. Michael has gone over some of the financial details, but I would encourage you all to read the more exhaustive description in our MD&A and our notes to the financial statements.

As Mike mentioned, our backlog is at a record high, $255 million. That represents almost 2 years of revenue at current production levels. Needless to say, we're in an enviable position of being in high demand by the attractions industry blue-chip global theme park operators. However, unlike previous quarters, when we reported an increase in the high backlog, this quarter, we've demonstrated that we can turn that backlog into positive EBITDA.

In our Q1 2019 news release, we indicated that we anticipated revenues of $40 million per quarter for the balance of the year. We continue to believe this is a reasonable expectation for the year. Our Chief Operating Officer, Hao Wang, has an extraordinary passion and skill at improving the efficiency and effectiveness of operations. He and his team are having a very positive impact on how we bring our products to market faster and at an attractive and growing margin. Our operational streamlining program continues at pace. We continue to have a laser focus on maximizing margin and reducing overhead in all aspects of our operation. A number of these initiatives take many months to implement and months before they impact the bottom line positively. We're on track for a profitable balance of the year, on pace with the profitability registered in the second quarter of 2019.

As you know, much of our work is confidential. We are a supplier for the top theme parks that want to keep the focus on their brand, not their supplier's brand. So we simply cannot publicly celebrate when we have completed a major new attraction for them. However, I want you to know about a major accomplishment for us. Last month, the world's largest operator of theme parks opened a masterpiece attraction in Asia, which stars a custom-built ride system by our manufacturing company, Dynamic Attractions. It is the ninth ride system of its kind that we've provided to this global theme park company over the past 2 decades. When we created the first one, we invented a new genre. Guests and fans from around the world have flocked to the ride and -- to ride this new attraction in Asia, and the reviews are glowing. It is clear that the new iteration of this amazing ride is the best yet. I'm proud of all the hard work done by our company to fabricate and install this ride that is bringing so much joy to so many people.

Our co-venture initiative is structured to allow Empire to participate on an equity basis through its 74% controlling ownership of its co-venture subsidiary called Dynamic Entertainment. Dynamic Entertainment is expected to produce stable long-term recurring and growing revenue and profit streams for the company. Our first co-venture is well underway. A long-term operating agreement is in place for the development and operation of a 39-seat co-venture flying theater attraction in The Island at Pigeon Forge, which is located in the Smoky Mountains of Tennessee. The Island is the sixth most popular amusement park in the United States and the ninth most popular one in the world, according to TripAdvisor. It represents an excellent location for our first co-venture with an excellent operating partner, who owns the island. The co-venture has attracted our ride -- sorry, has contracted our ride manufacturing business, Dynamic Attractions, to provide one of its patented flying theater attractions. We expect the attraction to open in March of 2021. Dynamic Entertainment has an option to buy a 50% equity interest in this co-venture, which allows us to participate while at the same time deferring the upfront cash investment.

Negotiations are proceeding with several other prospective strategic co-venture partners in world-class sites along with the associate financing arrangements. Our co-venture business is on the launchpad. The pipeline of opportunities we're looking at high-traffic tourist locations is very exciting.

Another update I'd like to share with you is the Thirty Meter Telescope, also known as TMT. Empire will complete its design contract for the telescope's enclosure by the end of 2019. The design we created for the observatory is unique and will be something that Canada and Canadians can be proud of. There remain several uncertainties related to construction schedule, site location, contracting methodology or the fabrication of the enclosure and the changing dynamics of construction risk. The company is weighing all of these factors as it completes the design contract by year-end, and we'll keep the shareholders apprised of any material developments.

In summary, we believe that the results from the second quarter 2019 demonstrate that Empire has turned the corner and is on a solid path toward significantly improved financial performance. This against the backdrop of a growing market for our products.

I would like to leave you with 3 takeaways. First, our business is substantial and growing profit potential. Second, Empire has now proven and will continue to prove that we can convert our impressive backlog into profitable business. And finally, we're on the verge of initiating a new lucrative and potentially company-changing revenue stream in our co-venture business.

Empire's executive management team is here to answer your questions at this time. Operator, would you facilitate the question-and-answer part of the call?

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Questions and Answers

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Operator [1]

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(Operator Instructions) There are no questions at this time. I would like to turn the conference back over to Mr. Guy Nelson for any closing remarks.

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Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [2]

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As you can tell from today's report, we're seeing the results of our strategy. Empire's strategy, experience and resources makes us well positioned in an exciting fast growth market, and we're focused on leveraging our proprietary IP. I'm confident in our ability to deliver strong financial results throughout the year and into the future. On behalf of all of us, thank you for your interest in Empire. As Allan mentioned earlier, you can reach us by e-mailing him. Allan's e-mail address is on the website, which is empind.com. And tomorrow, you'll find a recording of this conference call there as well. Thanks for attending.

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Operator [3]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.